Does high velocity mean high prices for Bitcoin?

Simply put, velocity is a measure of how quickly money is circulating in the economy. For Bitcoin, the figure is calculated by dividing the on-chain transaction volume (in USD) by the market cap, i.e. the inverse of the NVT ratio.

The value for the same has risen significantly in 2020, relative to 2019. In fact, the value was relatively higher in June/July 2020 and corresponding to that, the price did cross $10k. However, interestingly, Bitcoin’s velocity was much higher in the last quarter of 2019 and most notably, the price did not respond to it in the said case.

Based on Woobull’s Velocity charts, it can be noted that the metric dropped in 2018, a drop that coincided with the time when a higher percentage of the supply was inactive. Bitcoin’s historic bull run was followed by a price decline, with the same starting in early-2018. These concerns led to a drop in investor confidence and Bitcoin was more like a reserve asset, rather than one being circulated. In fact, HODLers held on to their purchase of the asset above the $13k-$17k level and started selling only recently above $11k or $11.5k.

While the cryptocurrency’s present price hike was induced by several factors, a significant factor was Bitcoin’s velocity.

In fact, the sum total of off-chain and on-chain velocity has risen YTD. Based on a recent research report by Crypto Research, off-chain velocity has increased considerably since 2019 and it is nearly directly proportional to Bitcoin’s price.

Bitcoin’s Off-chain velocity v Price || Source: CryptoResearch

Such a positive correlation actually developed in March of 2019. Since then, there have been two price rallies and the velocity of off-chain transactions has only increased. Additionally, on comparing on-chain and off-chain velocity, it can be observed that on-chain velocity has dropped. However, off-chain is making up for this drop.

Off-chain v On-chain velocity || Source: CryptoResearch

The overall impact of increasing off-chain velocity is seen in the price hike above the $11k-level. The total velocity value at this time indicates that Bitcoin is being held by investors for the near-term, and it is more liquid. It is being held as quick cash, rather than as an asset reserve by retail traders. In fact, back in 2019, values indicated that it was being held or accumulated for the long-term, with the price hike following soon after in mid-2020. Further, several HODLers from 2019 are booking unrealized profits in the current cycle.

Since the current value indicates that retail traders should trade/HODL only in the short term, the value may change when the volume increases. Retail investors may have more clarity on the bigger picture once the velocity increases to match the 2017 or early-2018 levels. For now, charts signal a short-term price hike and short-term accumulation.

Leave a Reply